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Fiat Currency Vs Gold Standard which is better?

I'm having trouble with this argument which is better Fiat Currency or Gold standard. As inflation keeps on rising I've been thinking that maybe going Fiat currency was the wrong way to go for the government, Should we change it back to gold standard if possible?

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    Jun 12 2011: think about it that way: why decide which money system to use? why don't let people choose freely? if you remove all laws that lock people in in any currency, remove taxation on exchange gains, etc. we will see which money people trust.

    i don't know the answer, but we can guess. throughout human history, gold was the choice of the people. fiat money systems can exist only with an enforcing state.
  • Jun 15 2011: For the first time in human history, the entire world is on a fiat monetary system. Fiat money is money that is backed by debt and the promise to repay. In other words, the intrinsic value of the bill (any denomination) is zero. You can take any bill out of your pocket and look at the top. It reads, "Federal Reserve Note". The Federal reserve is not a part of the U.S.government and has Zero reserves. The Federal Reserve is in fact a private bank. When you hear that the Fed is using "Quantitative Easing" to prop up the economy. They are printing paper money.

    On the "Gold" standard, you cannot print gold. Every dollar, yen, Euro would be backed by gold or silver. The reason that public officials do not want a gold standard is because they cannot print precious metals. Gold and silver are real money. The money used by ever country is not a money, they are currencies backed by nothing but debt.

    It is my belief that if the us were to go back to a gold standard, a cup of coffee would again cost just 2 cents. A dollar today would be worth 1.05 in twelve months in the future. Not the other way around. Inflation with a currency, which we have today, is the silent way of robbing every citizen in the world of their wealth. And they do it without anyone noticing.

    Gold and silver have been used as money for the past 3000 years. It is light, spongable, and rare. it will not tarnish nor break down. Go out and start investing in gold and silver to protect your wealth.
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      Jun 15 2011: Accurate and well said, John

      ..only problem is we couldnt go back to a gold standard if we wanted to

      and you are right printing more money robs every citizen..those hit hardest by inflation are those whocan least afford it.
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        Jun 15 2011: What would be some of the problems of returning to a gold standard. I'm not sold on the idea, but its hard to see a fiat system being sustainable for any real length of time.
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          Jun 16 2011: Anthony
          The price of Gold moves up and down more than the Dollar.
          Moving to the Gold standard is like sailing a boat on a river and saying you think the water's a bit choppy so let's go to sea!
          Any idea of moving to a currency based on a single commodity is insane versus what we have now where currency swings in value are damped by the value of that currency being driven by market forces (effectively real interest rates of a basket of other currencies) that have far gently movements. The price of gold has almost TREBLED is 5 years!!!
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          Jun 16 2011: james, currencies also go up and down compared to each other. you can't do anything about it. there will always be price fluctuations.

          however, gold has the least reason to fluctuate. the amount of gold is near fixed. it is impossible to inflate gold. the demand for gold as a commodity changes only marginally. since gold is global, the effect of local changes on it is minimal.

          we don't need gold to achieve all this, though. pure electronic money can do just as well or better as long as the amount of money is fixed, and nobody can create or destroy even a single unit of it. however, with such computer money, trustfulness is an issue. with gold, it is not, since it is physically impossible to create gold.

          homework: what about the gold mines?
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          Jun 18 2011: Krisz,

          2 things..

          I can't think our any currency where there has been a 3-fold movement in just 5 years!
          We get upset by a 10% change in maybe a year between the Pound and the Dollar.

          Also, the price of Gold has nothing to do with it's scarcity.... there's tons of the stuff.
          It's just tradable paper like Currency, Bonds, CDSs, Pork Bellies, Derivatives, or indeed a loaf of bread, a Boing 747, human kidneys or whatever. There is no distinction between anything we consider "real" or "un-real"; all are simply traded items with a market value. The distinction between fiat currency and fixed exchange rates is totally bogus, because all that happens with fixed exchange rates is internal price movements within a country to compensate. Eg: assuming Greece doesn't leave the Euro, wages will have to fall and real-consumption decrease and the "real" value of the Greek economy dramatically scale back.
          Currency is a wonderful thing because it's a fantastically pure form of Economics that we see operating at scale.

          So, just one more time. A currency is just a traded commodity, doesn't matter if it's "backed" by Gold or a promise to pay etc. In essence the value of a currency is just a derivative of interest (real) rate expectations. Indeed, a currency is just a "Derivative".
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          Jun 18 2011: james, price of everything is exactly determined by scarcity.

          the quality of a money lies in its trustfulness. the problem with the dollar is the amount of new dollars coming to existence. what good is having a dollar if someone else makes them in a large factory (called the FED)? that's why gold is better. governments can't create it.

          gold is a commodity, but its use as a commodity is minuscule compared to its use as money (or as an investment, which is basically the same). that is actually good. it means that demand for gold does not fluctuate. and it is determined by the amount of gold, which is quite stable.

          fiat money is not commodity.
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          Jun 18 2011: Krisz,
          Scarcity has nothing to do with pricing - that's like high school economics.
          It's yield that determines price.
          Interest rate, dividend, yield on renting an apartment, return on a derivative, how much you can sell on a loaf of bread for. There's zillions of dollars in currency, and tons of Ford stock, and billions and billion of dollars of value of structured and unstructured derivatives... all price on the basis of yield (risk and return). Nothing else matters in economics, the whole idea of supply and demand has nothing to do with how Individuals and economies work, which about return... return on investment, yield, interest, whatever you want to call it. The price of anything is determined by the return associated it with. Why does this matter? Because to answer the question at the top, really, there is no difference between a fiat currency and fixed currency [fixed vs another commodity (whose price floats anyway, in the case of Gold way more than any currency anyway)]. They're both just tradable paper, you can swap for other currency or bonds or debt or cars or loaves of bread.
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          Jun 19 2011: it seems you forgot high school economics :) if something is not scarce, it has no price at all. price is established by supply and demand. for superabundant (not scarce) goods, the price is zero, because the supply is infinite. 101 indeed.

          creating new money affects the value of money. it would not be problem if the money would appear everywhere miraculously. but it is not the case. as the new money is poured into the economy, those who have a stock of money (like in a bank), are on the losing side. the actually lose value. the entity that created the money (king, bank, FED, counterfeiter) is on the winning side. they actually gain wealth. that is hidden taxation, and hurts the economy in various ways.

          that's why we need non-inflatable money.
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          Jun 19 2011: Supply and demand is irrelevant. Yield is what determines pricing. Take houses, let alone Government Bonds of which there is infinite supply and apparently demand, the price is determined not by supply and demand but by their yield (Rent + equity gain - interest rate and inflation). Same for Stock, same for CDSs. bonds, anything really, same for a Currency... and I do think the easiest way to think of a Currency is as a derivative, that in essence is product of interest rate arbitrage across multiple economies, ie: Dollar yield (or exchange rate, as you would call it) relative to other countries is a function of future interest rate expectations of all currencies.
          A simple test that shows it's "yield" that determines pricing of currency (just like Stock or any tradable paper) is to look at The Economist's Big Mac index, or indeed any other PPP kind of conversion of currency vs actual exchange rates. Many currencies are higher over valued or under valued versus what the currency can buy (eg: a Big Mac in New York versus London), this is because a Currency's price (exchange rate) is set by it's yield.
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          Jun 19 2011: what is the yield on potatoes? what is the yield on a pair of shoes?

          and just as you noted, inflation destroys yield if the contract was in money terms. that's (among other reasons) why inflation is bad. there is no such thing as gold inflation.

          i'm not going to explain it again.
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          Jun 19 2011: Well the price of Gold has (in Dollars, or expressed in Big Macs) trebled in 5 years, ie: a Kg of Gold buys 3 times as many Big Macs as it used to. Hey, I guess if the Dollar had being tied to the price of Gold, I could buy 3 times has much bagels and coffee next time I'm in New York!! Anyway, the whole idea of coupling a Currency (which tends to be reasonably stable) with a Commodity like Gold (the price of which is very unstable) is a bit odd. It's like saying you get car sick on the way to the rollercoaster!!!
          2nd, even though it is a bad idea to link your Currency to Gold, there is really no difference to a Currency whose exchange rate is governed by market forces and floats against a basket of currencies or is fixed against Gold, which, er, floats in value against a basket of currencies!! It's an entirely spurious distinction, either way a currency is priced relative to other commodities/currencies, and is based on yield, just like Bonds or whatever, that's how currency markets work.
          3rd point. Pricing is set in all markets by yield, not supply and demand. There's lots of Dollars, there's lots of Government bonds, the price is set by the return offered and the,. Same with buying a house, the price is set on the basis by how much I can rent it out for. Potatoes, yep, price is set by yield, just like Grain, Corn etc (check out the Glencore float. The price of potatoes is set on the basis of their relative yield versus a forward contract on grain or whatever. I don't think a market (liquid) exists for shoes, but the price is set by persona utility (a kind of yield) not by supply and demand. Labour economics is a great example. If you're employing consultants for example, what you pay them is entirely based on how much you can charge them out for (ie: your yield) to clients. If you employ folks in your watch factory, supply of labour versus your demand doesn't determine price of that labour, it's the yield you can create from employeeing that labou
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          Jun 19 2011: so? as i said there will be fluctuations always. especially if states "tweak" the economy, and investors are escaping the fiat currencies.

          fiat currencies are fluctuating, and inflating. fiat money is inherently unstable. inflation is almost 100% with fiat money.

          no matter how many times you repeat that yield theory, prices are still set by supply and demand. anticipated yields drive up demand, thus the price.

          labor market is no exception. supply and demand sets wages. the anticipated marginal revenue product will (largely) determine the demand. together with supply, they determine wage (price).
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      Jun 16 2011: John
      Hi, I don't quite agree with your definition of money. A Dollar is not backed by a promise to pay or by debt, it's simply tradable paper, like bonds, stocks, the famous CDSs or whatever. Or Indeed pork bellies, oil, gold, or at some point in the future, water. A currency is valued by what people will pay for it, in essence largely driven by current/future interest rates. A Dollar is expressed in the value of Yen, Euros etc, or indeed for oil, Ford stock or whatever. There is not distinction between a currency and something "real" like a company stock or bond or something real like a loaf of bread. A simple way of understanding this rather than say that a load of bread costs one dollar, express it as one dollar costs a loaf of bread.
      Inflation by the way is a really great thing (within limits) as tends to make real interest rats lower, and therefore easier to invest in capital equipment, build new auto plants, drugs labs etc, and also helps liquidity and fluidity in the circulation of money. Anything under 7% is a good thing.
  • Jun 20 2011: Alright everyone. People are stuck on what the price of everything is or its cost. The real question is: what is the value? Price and value are two completely different things. If the value of the dollar is falling, the price of everything will rise. Why is the value of the dollar falling, the fed is printing money day and night. Debt to GDP for the US is at 120%. Soon the fed will have to print money just to pay the interest on the debt when interest rates rise on treasuries. When that happens.....that is when hyperinflation sets in. All the foreign governments will dump US treasuries and all those dollars will fall back on American shores. When the money comes back to the US, gas will go to $20.00 a gallon. We are exporting our inflation to this point. That will not last for very long. When foreign governments see the value of the dollar falling. They will sell their dollars. When the countries of the world decide that the dollar is no longer stable, it will loose its world reserve currency status. When that happens, no one will want our money. I mean when we go to buy oil from the middle east, they will refuse our currency. Can you imagine that, .................you better start.
  • Jun 15 2011: Just think about this..... It has been said that. and I quote "Gold is the money of Kings, Silver is the money of gentlemen, Barter is the money of peasants, debt is the money of slaves.
  • Jun 20 2011: Dear M. Walker,

    I respect your opinion. Can you tell me where where a US dollar comes from and how it gets into the system? Once you answer that question, I think you will change your statement.
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      Jun 24 2011: Hey there JOHN,
      Can you maybe change the wording of your question as I don't quite understand it.
      A dollar is no different than any other financial instrument, eg: shares in Ford, US Treasury bonds, CDSs etc.
      I buy dollars with the expectation of a change in value versus another currency.
      It's the same as options on a stock at a future date of whatever.
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    • Jun 15 2011: Jame's point on how "[money] supply in Developed economies could never be backed by Gold in such a spurious way, when the overall wealth of nations (houses, railways, internet companies etc) is massively massively more than currency reserves or indeed the amount of Gold" really gave me something to think about. That we might really not have enough gold to go around if we actually went gold standard, but on the other hand I feel that Fiat currency is the wrong way to go. Fiat currency seems to be baseless and has not merits when we keep printing money.

      I just fear one day we might have too much of the fiat currency with no backing (just government saying it has value) in circulation might just collapse due to the inability to control the inflation.

      On a very wild note maybe we could back currency based on carbon emission ( Lesser emission = higher value) but that would be crazy.
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    Jun 13 2011: Currencies movements have little to do with Inflation rates, and exchange rates are more impacted by interest rates, ie: the cost of borrowing in that currency, the reward for investing in that currency.
    Interest rates themselves tend to be set by Governments or quasi-government bodies, often with a political motivation, and hence why currencies today are "Fiat' currencies, ie: fake in a sense, created by government setting interest rates but also by market forces treating a currency as a tradeable commodity, or indeed a bet.
    Currencies are subject to market forces which arguably outweigh any rational values on the basic of intrinsics, ie: hard to explain strength of the Dollar. Many bets have been taken on currencies, eg: famously when the UK pulled out of the EMS, and in the case of several Asian economies, and these have had devastating impacts on countries.
    I think the question is a bit of a "20th Century" idea though... Wealth creation within a nation happens at such an explosive rate, I can not see how a currency can be tied to another volatile commodity like Gold, where the price is just as variable as a currency is today. You might say that Gold is a function of the currency-standard, as Gold is valued in "currency".
    The fluidity of money is just a phenomena of 21st C economics, and we have to embrace the connectivity of global trade, interest rates, and exchange rates.
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      Jun 13 2011: james, the adoption of a united currency by arab and perhaps african nations under a gold standard ( the gold dinar)would tear the $eu and $us to shreds and totally shift global economic power especially f all oil trades from those nations were in dinar.( not to mention inflation effcets which would be justthrough the roof..$EU and $US. Such plans have been long affoot and have raised great fears in currency markets everywhere. The UK is now even allowing investment in gold dinar I believe through its commodotities boards).

      At my blog a pretty solid article with pretty solid links to the background and history.
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        Jun 14 2011: Hi Lindsay, I know this was a big discussion about 10 years ago, along with Islamic banking, "credit" (and I use the word carefully in an islamic context) cards etc. I honestly thought the idea had gone away, and I stand to be corrected. My quick uninformed opinion: The arab countries peg their currency to the Dollar 9which is super sensitive to Oil prices), and indeed the UAE already has a single currency the Dirham. By pegging to the Dollar (a currency sensitive to Oil prices) there is in fact a dampening effect that Oil prices go up and the Dollar goes down, this dampening helps with Economic stability. Just my opinion, but the heterogeneity of Arab economies with varying dependence on oil exports/oil pricing would make an Arab single currency impractical, especially one based on the value of Gold and in essence with try be an arbitrage between Gold and Oil, two pretty volatile Commodities whose pricing move together, Oil goes up and Gold goes up. It's often said that Fiat money, backed by Gold, has an intrinsic value. This is nonsense, Gold has little intrinsic value, and is no more "real" that trading currencies as they are now, basically as paper representing interest rate differences between countries.
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          Jun 14 2011: Libya in partciular had been buying gold for years and Gadaffi was definitely going here..Sadam Hussein also...Its is definitely not a dead issue..did you see the article at my post by the guy at Swissbank? It hasn;t gone away at all.

          This would be the perfect moment in time o do it to with the $US and $EUa bit wobbly. I think ihave an open ended TED Converstaion somehwre on the Gold Dinar. I am thinking of buying afew dinar myself...
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          Jun 14 2011: UPDATE: a guy who is edito of GDR Magazine ( a world currency exchange orieneted magazine) just left a post at my posterous blog that he did not think the dinar was ever a serious threat. I posted it.

          Looks like he should know more about Dinar than me. He debunked as a wester culture economic Jihad meme but his link was to the current dinar.. a small gold coin. I don't think either Gadaffi's plans or husseins ever imaiged using gold coin for currency..but a gold back currency called dinar...but I am not expert
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    Jun 12 2011: The arab nations will do it firts and sink all our currencies..see "Gold Dinar"
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      Jun 14 2011: very true..under the gold standrd youcan't just print more currency to get out of debt....as we have been doing.
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      Jun 14 2011: Vineet How exactly would you create an economy based on energy. As I understand it (which is not well) gold become the base for different economies because beside being pretty it was pretty useless. It could work on a symbolic level. I think its an interesting idea.
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      Jun 14 2011: Hmmm
      All commodities have no intrinsic Value (or very little). Gold isn't much use for anything. They're only of value because they are traded, just like we trade currencies. It's a spurious distinction to talk about a currency backed by a Commodity (Pork Bellies, Gold, whatever, Oil, Water...?) versus one where the value floats.
      2nd problem, "money" is a characterisation of Wealth. We increase Wealth very very rapidly - Post Industrial Revolution, we have doubled Real GDP every generation (33 years) in the West. If we all spend all our Wealth each year, we need to increase the amount of money. What is the point of digging more Gold out of the ground to match the growth in our Wealth. Final point. The backing of a currency with Gold is ultimately impossible now.... the fluidity and volatility of the Money supply in Developed economies could never be backed by Gold in such a spurious way, when the overall wealth of nations (houses, railways, internet companies etc) is massively massively more than currency reserves or indeed the amount of Gold!!!
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        Jun 14 2011: why do you say water, or oil have no intrinsic value.
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          Jun 14 2011: A good point. I should have been clearer. Water and Oil have MORE intrinsic value than Gold, and pretty soon in some countries the currencies might be better back with Water than Gold.
          It's ironic that the discussion should be about (Arab) states using Gold to back a currency against when in fact Oil itself is less volatile in it's pricing!!! The Oil economies could back their currencies with.... Oil!!
          But one day, yep, it'll be Water ;)